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Schultz v. Commodity Futures Trading Commission

decided: August 24, 1983.

BURTON SCHULTZ, PETITIONER
v.
COMMODITY FUTURES TRADING COMMISSION, INCOMCO, INC. AND PHILIP M. SMITH, RESPONDENTS



Appeal from a ruling of the Commodity Futures Trading Commission which dismissed petitioner's claim against respondent Smith for reparations under 7 U.S.C. § 18. Reversed and remanded.

Oakes, Cardamone and Pierce, Circuit Judges.

Author: Cardamone

CARDAMONE, Circuit Judge:

There are two matters pending before us in the present case. The first is petitioner Burton Schultz's appeal from an order of the Commodity Futures Trading Commission which dismissed Schultz's claim against respondents Incomco, Inc. and Philip M. Smith, Incomco's president, for reparation arising from respondents' alleged violation of the Commodity Exchange Act (Act). The second is the Commission's motion to have the case remanded to itself for consideration of a theory of damages it claims it had not previously addressed. Because the Commission failed to apply the appropriate legal analysis, we grant the motion to remand and set forth the standards and procedure which should be employed on remand and in assessing similar claims in the future.

I

On June 6, 1979 Schultz opened a commodity futures trading account with Incomco by depositing a stock certificate worth $4,000 with Smith. There is no evidence in the record indicating whether Smith had or needed to have the power to negotiate the stock certificate, if necessary, to insure that Schultz's account was properly margined. The value of the certificate did not appear as a credit on Schultz's periodic account statements.

No one had authority to make trades for Schultz's account without his personal authorization. Incomco executed trades authorized by Schultz during June and July, 1979. The gross equity attributable to these profitable trades appeared on Schultz's statements.

At petitioner's direction, Incomco bought two August 1980 pork belly futures contracts for Schultz's account, one each on June 14 and 27, 1979 at $48.40 and $45.80 respectively. By August 14 these two open positions had incurred losses to the extent that the gross equity balance of $3,436.60 in Schultz's account actually had a net worth of less than $500. This situation caused Schultz's account to be undermargined. No margin call was made on petitioner and no attempt was made to negotiate the deposited stock certificate in order to satisfy this undermargined status. Nevertheless, on August 15 and 16, 1979 Smith liquidated Schultz's August 1980 pork belly futures contracts at $42.25 and $42.85 respectively, leaving a negative net balance of $60.90 in Schultz's account.

Petitioner received a confirmation of this purchase and sale transaction on August 17, 1979, but asserts that he did not understand its significance. When the transaction was reflected on his next account statement, he went to Incomco's offices and retrieved his stock certificate. On October 5, 1979, he filed a claim with the Commission against Smith and Incomco for reparation under section 14 of the Act, 7 U.S.C. § 18 (1976 & Supp. V 1981), claiming that the unauthorized sale violated section 4b of the Act, 7 U.S.C. § 6b (1976) and that he was damaged as a result. Though Schultz stated in his claim that it was "difficult for [him] to fix actual damages," he asked for $3,436.60, representing the equity in his account immediately prior to the sale of his pork belly futures contracts. He noted that within the month after the unauthorized closeout his account would have had a net worth of between $1,000 and $5,000.

Since the alleged damages did not exceed $5,000, the claim was adjudicated under the Commission's summary proceeding rules, 17 C.F.R. §§ 12.91-12.95 (1982), and all proof was submitted in documentary form. See 7 U.S.C. § 18(b) (1976) & Supp. V 1981). During the pendency of Schultz's claim, Incomco filed a voluntary petition in bankruptcy and all reparation proceedings against that company were stayed, but the Commission continued with its determination of the charge as against Smith.

On October 30, 1981 a Hearing Officer issued an Initial Decision finding that the subject sales constituted unauthorized trades in violation of section 4b(A) of the Act, and ordering Smith to pay Schultz damages of $3,436.60 plus interest and costs. Acting sua sponte, see 17 C.F.R. § 12.95(e)(2) (1982), the Commission notified the parties on December 2, 1981 that it would review the Initial Decision in order to consider the following: whether the respondents' conduct constituted a violation of the Act, whether there was a causal nexus between this conduct and the damage award made by the Hearing Officer, and whether Schultz had a duty to attempt to reenter the market in order to mitigate his damages. The parties were invited to brief these issues but neither responded.

In a decision dated January 17, 1983 the Commission ruled that it "need not reach the question whether [respondents '] conduct violated the Act" because it found no causal connection between this conduct and Schultz's losses. It attributed loss of the $3,436.60 equity in Schultz's account to his retention of the unprofitable pork belly futures contracts, and found that respondents' allegedly unauthorized liquidation did no more than realize the loss already incurred by petitioner's retention of these losing positions. As for Schultz's claim of possible profits of from $1,000 to $5,000 in the month following liquidation, the Commission stated that Schultz's failure to attempt to mitigate his damages by reentering the market, or to prove that it was financially or otherwise unreasonable for him to do so, precluded recovery for potential lost profits. It summarized its findings by stating that neither Schultz's prior market losses (of the $3,436.60 equity in his account) nor subsequent lost profits (of $1,000 to $5,000) was causally related to respondents' liquidation of Schultz's open positions. The Commission thereupon dismissed petitioner's complaint.

Schultz appealed directly to our court under 7 U.S.C. § 18(g) (1976). The Commission moved for a remand, claiming that Schultz presented for the first time on appeal the argument that he could recover damages incurred between the time he first learned of the liquidations and the time that he could have reestablished his positions by reentering the market. The ...


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